Complex Instrument Allowance at Mutual Funds
42 Pages Posted: 22 Mar 2017 Last revised: 4 Nov 2019
Date Written: November 2, 2019
We study the loosening of restrictions on the use of leverage, derivatives, and illiquid assets by mutual funds. In contrast to previous studies, we find that the allowance of these complex instruments is associated with poor performance and higher risk. The underperformance is most acute during market downturns and among weakly monitored funds. We also find that mutual funds that actually use these instruments underperform. Overall, our results suggest caution in allowing funds to use these complex instruments.
Keywords: mutual funds, complex instruments, leverage, derivatives, illiquid assets, borrowing, margin, short selling, options, futures, restricted securities, performance, risk
JEL Classification: G11, G23
Suggested Citation: Suggested Citation